Shovel Ready

Yoshiyasu Ono of Osaka University had an interesting article in the Journal of Money, Credit and Banking this June on The Keynesian Multiplier Effect Reconsidered. In it he analyzes the special case of government spending on projects that are literally useless, such as paying people to dig a hole in the ground and then fill it back up. Although that’s not proposed as an accurate characterization of any actual government programs, the extreme case of literally useless spending helps shed light on some of the issues involved. According to traditional Keynesian models, even for the case of a completely useless government project, if we were to raise private-sector taxes by just the amount needed to pay the salaries of the hole-diggers, GDP would increase, with a balanced-budget multiplier of one. Yet, Professor Ono asks, how could paying the crew a salary to dig a useless hole possibly lead to an improvement in welfare relative to simply handing them a direct transfer and allowing them to spend more time safely and comfortably at home with the family? And, to make things very simple, if the source of funds for paying the workers was in fact a tax levied on those same individuals, how could we possibly conclude that the enterprise has increased total national income?

The answer is, we include government spending, even on useless projects, in the definition of GDP, and assume that the value of what is produced is the dollar sum that the government paid for it. The reason even useless government spending has a balanced-budget multiplier of one is that we now have a filled-in hole that we didn’t have before. So we have more goods and services (in the form of a newly filled-in hole) than we used to, and impute the value of this new extra stuff as added income for the nation as a whole.

Although it’s an extreme case, analyzing the consequences of a literally useless government project clarifies that, even in the midst of the deepest depression, the concern should not just be how much the government is spending, but also the direct value to society of the project itself.

And even in the midst of the deepest depression, the job market is still very dynamic with millions of Americans finding new jobs every quarter, even as others are unfortunately still losing theirs. There are lots of private-sector enterprises where someone thinks the value of what a worker can produce is more than the worker would be paid. The challenge is how to find even more of them.

I for this reason end up reaching a different conclusion from Free Exchange, which argues that our energy policy should be a completely separate question from how to get Americans back to work; John Whitehead made a related point. My counter is that there are some clearly identifiable projects that would put people to work constructing some extremely valuable infrastructure. Such projects ought to be on the top of anybody’s list of the kind of stimulus spending we would like to see at the moment.

Exhibit A for some energy infrastructure that the nation clearly needs is a better way to transport oil from the increasingly productive fields in North Dakota to the markets where it is most needed. A producer in North Dakota today can sell their oil for $82 a barrel, whereas refiners on the Gulf Coast are paying over $110 to import similar crude from countries like Venezuela, Nigeria, and Iraq. That price differential is an astonishing signal from the market of just how inadequate our energy transportation infrastructure is for the task at hand. Rail is being used to transport the oil as much as possible. But what’s really needed is considerably more pipeline capacity.

And TransCanada wants to spend $7 billion of its own money (no federal dollars asked for at all) to build exactly what we need in the form of the Keystone Gulf Coast Expansion Project. The pipeline would add capacity to transport another 500,000 barrels each day from Canada, North Dakota, and other regions in the U.S. to refiners on the Gulf Coast. At a price differential of more than $20/barrel, that would generate over ten million dollars in new wealth every day. Beneficiaries of that wealth creation include the estimated 20,000 Americans who would work on construction of the pipeline and $5 billion in estimated new property tax revenue for state and local governments over the pipeline’s lifetime. Here are details of how producers in North Dakota would connect to the project.